Failure to make a necessary adjusting entry for accrued interest on a note payable would cause which of the following?
A)An understatement of liabilities and shareholders' equity.
B)Profit to be overstated and assets to be understated.
C)Profit to be understated and liabilities to be understated.
D)An overstatement of profit,an understatement of liabilities,and an overstatement of shareholders' equity.

Question

Quizplus · Accepted Answer

Failure to record accrued interest results in an understatement of liabilities (since the interest payable is not recorded) and an overstatement of profit (since the interest expense is not recorded), which also leads to an overstatement of shareholders' equity.

Failure to Make a Necessary Adjusting Entry for Accrued Interest